When shopping around for the best super fund, lower fees can make a big difference by the time you reach retirement age – as much as $132,138 over a working life when comparing annual fees of 0.75 per cent and 1.5 per cent. But even low percentage-based fees extract far too much from your nest egg, say some analysts. Is it time for a rethink?
The arrival of US investment giant Vanguard in the Australian superannuation industry has been greeted with excitement, especially as its default MySuper product charges fees of just 0.58 per cent of your balance per annum.
According to Canstar, the majority of people in a default super fund are paying between 0.89 and 1.17 per cent annually.
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Vanguard’s fees are certainly low in comparison, but is charging fees based purely on a percentage of your total balance fair?
Business specialist John Beveridge welcomes Vanguard’s arrival, writing that it will maintain pressure on funds to cut fees.
In a column for SmallCaps, he argues that the system of charging investment and administration fees needs a radical revamp, describing the system as “flawed and unfair”.
Why charge percentage fees at all?
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“Most of the answers are usually along the lines of ‘we’ve always done it that way’ or ‘it is the simplest and most easily understood method’, which is all a load of nonsense,” he says.
“There is a cost to administering any super fund but that cost would best be expressed as a flat fee – let’s for the sake of simplicity call it $500 a year.
“There is also a cost to invest the money into a variety of asset classes and that cost really should not be expressed as a percentage of the amount invested.”
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Funds would no doubt argue that higher balances incur higher investment costs. But in reality, superannuation is a pooled investment strategy, meaning fund managers are using a pool of funds contributed by many members to buy a larger number of assets to benefit the group as a whole, says Mr Beveridge.
Using Vanguard’s 0.58 per cent fee as an example, someone with a balance of $20,000 in their super would pay $116 per year in fees, while someone with $2 million would pay $11,600.
But as these two members are part of the same product, the fund managers have done the same amount of work for the first account and the second.
A better alternative may be to charge a flat annual fee, regardless of balance, or to set fees based on the actual investment services provided for the year.
What do you think would be a more equitable approach to super fees? Do you know what fees your fund charges? Let us know in the comments section below.
